Ensign Energy Services Inc.

Ensign Energy Services Inc. (TSX: ESI) is a Canada-based oil service company. The group offers oilfield services include drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals and transportation. The company provide these services in Canada, the United States and internationally.

Key highlights 

• Riding on Acquisitions:The Company completed the acquisition of Halliburton’s 40% ownership interest of the Trinidad Drilling International ("TDI") joint venture. The Company purchased ownership interest, inclusive of working capital of CAD 20.2 million in the TDI joint venture, in USD33.4 million. With this acquisition, the Company now owns 100% of TDI.

• Reduced Debt: The company’s total debt decreased by CAD159.4 million to CAD1,474.3 million in Q3 2020, as compared to CAD1,633.7 million in Q3 2019, partially offset by CAD 10.0 million due to foreign currency exchange fluctuations.

• Liquidity: The Company’s available liquidity under cash and available borrowings under its revolving credit facility is of total CAD 181.4 million as on September 30, 2020. 

Financial overview

Source: Company 

• The company posted revenue of CAD 156.9 million, in Q3 2020, decreased by 60% as compared to CAD 393.4 million in the previous corresponding period, primarily due to adverse impact of the COVID-19 pandemic on the oil and natural gas industry led to decrease in the number of operating days in all regions; also, the demand was low.

• Adjusted EBITDA posted by the company in Q3 2020 was CAD39.5 million, decreased by 60% as compared to CAD97.9 million in Q3 2019 due to above-stated reason. 

• The company posted a Net loss attributable to common shareholders in Q3 2020, of CAD36.1 million (CAD0.23 per common share) compared to CAD37.6 million (CAD0.24 per common share) in Q3 2019, primarily due to low revenue, higher depreciation and restructuring expenses, offset by a gain on repurchase of Senior unsecured notes. 

Risk associated with investment

The energy industry continues to have a challenging outlook as the COVID-19 pandemic has resulted in significant global oil supply imbalances and near-term crude oil price volatility. There are many other risks involved with the company which can create a massive impact on the operations and financial health, such as fluctuations in the level of oil and natural gas exploration and development activities, changes in drilling and well-servicing technology, the impact of weather and seasonal conditions on operations and facilities, etc. 

Valuation Methodology (Illustrative): EV to EBITDA 

(Note: All forecasted figures and peers have been taken from Thomson Reuters) 

Stock recommendation

The energy industry continues to have a challenging outlook as the COVID-19 pandemic has resulted in significant global oil supply imbalances and near-term crude oil price volatility. We believe, in the coming days as the Oil industry is likely to return to normalcy with a gradual recovery in demand. Higher industrial and manufacturing activities, and easing in travel restrictions, would further provide support to the oil industry. A stable demand scenario is likely to result in higher demand for drilling, servicing, and other related equipment. Based on the rationales discussed above and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 0.93 on December 11. We have considered Step Energy Services Ltd, Trican Well Service Ltd, CES Energy Solutions Corp, etc. as the peer group for the comparison. 

1-Year Price Chart (as on December 11, after the market close). Source: Refinitiv (Thomson Reuters)

Frontera Energy Corporation

Frontera Energy Corporation (TSX: FEC) is a Canadian-based exploration and production company, and its operations include exploration, development, and production of crude oil and natural gas reserves in South America.

Key Highlights:

• Rescheduling of Petroleum License for the Corentyne Block: FEC along with the joint venture with CGX Energy would re-commence its exploration activities in Corentyne block located in Guyana. As per the agreement the Joint Venture has been extended to November 27, 2021. The above project remained on halt due to the COVID-19 pandemic. The company agreed to amend a 54.96 acres lease located near to Berbice River on its eastern bank for its deepwater harbour project. 

• Resolution of Transport disputes in Columbia: Recently, the company reported that it had reached an agreement with Colombian court regarding a binding settlement to resolve all the disputes pending among them, related to the Bicentenario Pipeline. The above settlement includes a full and final mutual agreement of closing of all present and future amounts claimed by all parties in respect of the terminated transportation contracts for both the CLC Pipeline and the BIC Pipeline. 

• Strong Balance-sheet: The company has a strong liquidity along with manageable debt component and does not have any debt maturities till FY23, which is positive for liquidity preservation. 

Source: Company Presentations

Q3FY20 Financial Highlights:

• FEC announced its quarterly results, wherein the company posted revenue of USD 152.76 million, significantly lower than USD 277.676 million in the previous corresponding period (pcp). The decline was primarily attributable to lower production (43,202 boe/day versus 70,213 boe/day in pcp), coupled with a lower realization price (USD 36.31/boe versus USD 53.21/boe in Q3FY19).                            

Source: Company Reports

• Loss from operations reduced to USD 12.765 million, as compared to USD 18.897 million in the previous corresponding period, primarily supported by a lower oil and gas operating cost (USD 82.873 million versus USD 130.775 million in pcp) and a slide in depletion, depreciation and amortization (USD 60.960 million versus USD 94.019 million in Q3FY19).
• The company reported a net loss of USD 92.642 million, as compared to a loss of USD 48.656 million in Q3FY19. The increase in the net loss was primarily due to a higher foreign exchange loss (USD 12.450 million versus USD 3.735 million in pcp), extended other loss amounting USD 38.626 million, against USD 1.359 million in Q3FY19 combined with inclusion of reclassification of currency translation adjustments, amounting USD 23.956 million.
• The company reported cash and cash equivalent of USD 259.98 million, while total assets stood at USD 1,865.465 million.

Income Statement Snapshot (Source: Company Reports)

Risk: The company is exposed to the volatility in the crude oil prices, which could impact the group’s performance. Further, the next wave of COVID-19 outbreak would weigh on the crude oil demand dynamics.

Valuation Methodology (Illustrative): EV to EBITDA based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

In the recent past, we have seen a revival in the crude oil prices, driven by higher demand on account of gradual reopening of industrial and manufacturing activities. Hence, the stock gained ~49% in the last three months. We expect the demand for crude oil to continue to improve, which in turn would support the oil prices. A higher oil price is positive for the group. We have valued the stock using EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Enbridge Inc, Enterprise Products Partners LP etc. Considering the above-mentioned facts, current stock price movement, we have given a ‘Speculative Buy’ rating on the stock at the closing price of CAD 3.47 on December 11, 2020.

FEC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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